Tuesday, June 25, 2013

Hurray for John Cassidy in being gutsy enough to write clearly about the Edward Snowden situation, as well as the broad and gutless media acquiescence to the "government line," few questions asked. First, some balance from an interview in the Australian media with Thomas Drake, another former NSA employee charged with espionage (felony charges were ultimately dropped):

INTERVIEWER: Not everybody thinks Edward Snowden did the right thing. I presume you do…

DRAKE: I consider Edward Snowden as a whistle-blower. I
know some have called him a hero, some have called him a traitor. I
focus on what he disclosed. I don’t focus on him as a person. He had a
belief that what he was exposed to—U.S. actions in secret—were violating
human rights and privacy on a very, very large scale, far beyond
anything that had been admitted to date by the government. In the public
interest, he made that available.

INTERVIEWER: What do you say to the argument, advanced
by those with the opposite viewpoint to you, especially in the U.S.
Congress and the White House, that Edward Snowden is a traitor who made a
narcissistic decision that he personally had a right to decide what
public information should be in the public domain?

DRAKE: That’s a government meme, a government
cover—that’s a government story. The government is desperate to not deal
with the actual exposures, the content of the disclosures. Because they
do reveal a vast, systemic, institutionalized, industrial-scale
Leviathan surveillance state that has clearly gone far beyond the
original mandate to deal with terrorism—far beyond.

As far as I’m concerned, that about covers it. I wish Snowden had
followed Drake’s example and remained on U.S. soil to fight the charges
against him. But I can’t condemn him for seeking refuge in a country
that doesn’t have an extradition treaty with the United States. If he’d
stayed here, he would almost certainly be in custody, with every
prospect of staying in a cell until 2043 or later. The Obama
Administration doesn’t want him to come home and contribute to the
national-security-versus-liberty debate that the President says is
necessary. It wants to lock him up for a long time.

Cassidy goes on to examine some of the cultural reasons leading almost all US news figures to pretty much toe the government line and to heap slander on Snowden. It's not pretty:

Snowden took classified documents from his employer, which surely
broke the law. But his real crime was confirming that the intelligence
agencies, despite their strenuous public denials, have been accumulating
vast amounts of personal data from the American public. The puzzle is
why so many media commentators continue to toe the official line. About
the best explanation I’ve seen came from Josh Marshall, the founder of
T.P.M., who has been one of Snowden’s critics. In a post
that followed the first wave of stories, Marshall wrote, “At the end of
the day, for all its faults, the U.S. military is the armed force of a
political community I identify with and a government I support. I’m not a
bystander to it. I’m implicated in what it does and I feel I have a
responsibility and a right to a say, albeit just a minuscule one, in
what it does.”

I suspect that many Washington journalists, especially the types who
go on Sunday talk shows, feel the way Marshall does, but perhaps don’t
have his level of self-awareness. It’s not just a matter of defending
the Obama Administration, although there’s probably a bit of that. It’s
something deeper, which has to do with attitudes toward authority. Proud
of their craft and good at what they do, successful journalists like to
think of themselves as fiercely independent. But, at the same time,
they are part of the media and political establishment that stands
accused of ignoring, or failing to pick up on, an intelligence outrage
that’s been going on for years. It’s not surprising that some of them
share Marshall’s view of Snowden as “some young guy I’ve never heard of
before who espouses a political philosophy I don’t agree with and is now
seeking refuge abroad for breaking the law.”

Mea culpa. Having spent almost eighteen years at The New Yorker,
I’m arguably just as much a part of the media establishment as David
Gregory and his guests. In this case, though, I’m with Snowden—not only
for the reasons that Drake enumerated but also because of an
old-fashioned and maybe naïve inkling that journalists are meant to
stick up for the underdog and irritate the powerful. On its side, the
Obama Administration has the courts, the intelligence services,
Congress, the diplomatic service, much of the media, and most of the
American public. Snowden’s got Greenwald, a woman from Wikileaks, and a
dodgy travel document from Ecuador. Which side are you on?

Friday, June 21, 2013

If you're at all disturbed (I am) by the various recent revelations over massive data trolling by government agencies, you should read this article in the NYT by Peter Ludlow. It looks at the vast and largely invisible ecology of private security and intelligence firms that are not only gathering information on ordinary people, but actively creating and spreading disinformation (otherwise known as "lies") to discredit opponents of their corporate clients. They're information mercenaries who are essentially shaping reality as we see it -- and not with benign motives, you can be sure. Ludlow:

To get some perspective on the manipulative role that private
intelligence agencies play in our society, it is worth examining
information that has been revealed by some significant hacks in the past
few years of previously secret data.

Important insight into the
world these companies came from a 2010 hack by a group best known as
LulzSec (at the time the group was called Internet Feds), which
targeted the private intelligence firm HBGary Federal. That hack
yielded 75,000 e-mails. It revealed, for example, that Bank of America
approached the Department of Justice over concerns about information
that WikiLeaks had about it. The Department of Justice in turn referred
Bank of America to the lobbying firm Hunton and Willliams, which in
turn connected the bank with a group of information security firms
collectively known as Team Themis.

Team Themis (a group that
included HBGary and the private intelligence and security firms Palantir
Technologies, Berico Technologies and Endgame Systems) was effectively
brought in to find a way to undermine the credibility of WikiLeaks and
the journalist Glenn Greenwald (who recently broke the story of Edward
Snowden’s leak of the N.S.A.’s Prism program), because of Greenwald’s
support for WikiLeaks. Specifically, the plan called for actions to
“sabotage or discredit the opposing organization” including a plan to
submit fake documents and then call out the error. As for Greenwald, it
was argued that he would cave “if pushed” because he would “choose
professional preservation over cause.” That evidently wasn’t the case.

Team
Themis also developed a proposal for the Chamber of Commerce to
undermine the credibility of one of its critics, a group called Chamber
Watch. The proposal called for first creating a “false document, perhaps
highlighting periodical financial information,” giving it to a
progressive group opposing the Chamber, and then subsequently exposing
the document as a fake to “prove that U.S. Chamber Watch cannot be
trusted with information and/or tell the truth.”
(A photocopy of the proposal can be found here.)

In
addition, the group proposed creating a “fake insider persona” to
infiltrate Chamber Watch. They would “create two fake insider personas,
using one as leverage to discredit the other while confirming the
legitimacy of the second.” The hack also revealed evidence that Team Themis was developing a “persona management”
system — a program, developed at the specific request of the United
States Air Force, that allowed one user to control multiple online
identities (“sock puppets”) for commenting in social media spaces, thus
giving the appearance of grass roots support. The contract was
eventually awarded to another private intelligence firm.

This may
sound like nothing so much as a “Matrix”-like fantasy, but it is
distinctly real, and resembles in some ways the employment of “Psyops”
(psychological operations), which as most students of recent American
history know, have been part of the nation’s military strategy for
decades. The military’s “Unconventional Warfare Training Manual” defines
Psyops as “planned operations to convey selected information and
indicators to foreign audiences to influence their emotions, motives,
objective reasoning, and ultimately the behavior of foreign governments,
organizations, groups, and individuals.” In other words, it is
sometimes more effective to deceive a population into a false reality
than it is to impose its will with force or conventional weapons. Of
course this could also apply to one’s own population if you chose to
view it as an “enemy” whose “motives, reasoning, and behavior” needed to
be controlled.

Psyops need not be conducted by nation states;
they can be undertaken by anyone with the capabilities and the incentive
to conduct them, and in the case of private intelligence contractors,
there are both incentives (billions of dollars in contracts) and
capabilities.

Several months after the hack of HBGary, a
Chicago area activist and hacker named Jeremy Hammond successfully
hacked into another private intelligence firm — Strategic Forcasting
Inc., or Stratfor), and released approximately five million e-mails.
This hack provided a remarkable insight into how the private security
and intelligence companies view themselves vis a vis government security
agencies like the C.I.A. In a 2004 e-mail
to Stratfor employees, the firm’s founder and chairman George Friedman
was downright dismissive of the C.I.A.’s capabilities relative to their
own: “Everyone in Langley [the C.I.A.] knows that we do things they
have never been able to do with a small fraction of their resources.
They have always asked how we did it. We can now show them and maybe
they can learn.”

The Stratfor e-mails provided us just one more
narrow glimpse into the world of the private security firms, but the
view was frightening. The leaked e-mails revealed surveillance activities
to monitor protestors in Occupy Austin as well as Occupy’s relation to
the environmental group Deep Green Resistance. Staffers discussed how one of their own men went undercover (“U/C”) and inquired about an Occupy Austin General Assembly meeting to gain insight into how the group operates.\

Stratfor also had a broad-ranging public relations campaign. The e-mails revealed numerous media companies on its payroll.
While one motivation for the partnerships was presumably to have
sources of intelligence, Stratfor worked hard to have soap boxes from
which to project its interests. In one 2007 e-mail, it seemed that Stratfor was close to securing a regular show on NPR:
“[the producer] agreed that she wants to not just get George or
Stratfor on one time on NPR but help us figure the right way to have a
relationship between ‘Morning Edition’ and Stratfor.”

On May 28
Jeremy Hammond pled guilty to the Stratfor hack, noting that even if he
could successfully defend himself against the charges he was facing, the
Department of Justice promised him that he would face the same charges
in eight different districts
and he would be shipped to all of them in turn. He would become a
defendant for life. He had no choice but to plea to a deal in which he
may be sentenced to 10 years in prison. But even as he made the plea he issued a statement,
saying “I did this because I believe people have a right to know what
governments and corporations are doing behind closed doors. I did what I
believe is right.” (In a video interview conducted by Glenn Greenwald with Edward Snowden in Hong Kong this week, Snowden expressed a similar ethical stance regarding his actions.)

Given
the scope and content of what Hammond’s hacks exposed, his supporters
agree that what he did was right. In their view, the private
intelligence industry is effectively engaged in Psyops against the American
public., engaging in “planned operations to convey selected information
to [us] to influence [our] emotions, motives, objective reasoning and,
ultimately, [our] behavior”? Or as the philosopher might put it, they
are engaged in epistemic warfare.

Tuesday, June 18, 2013

From MIT Tech Review, this article explores an important question: is technology putting people out of work? That simple answer is of course "yes," technology in manufacturing, for example, is clearly replacing human workers on a massive scale. It's true elsewhere too: many of the poorly written finance articles you see today are also written by machines. But technology also creates jobs, and the bigger question is whether it creates more than it destroys. The article looks at the work of MIT researchers Erik Brynjolfsson and Andrew MacAfee who argue based on productivity data that technology is now on balance eliminating jobs, and is in large part responsible for slow growth in employment:

Given his calm and reasoned academic demeanor, it is
easy to miss just how provocative Erik Brynjolfsson’s contention really
is. ­Brynjolfsson, a professor at the MIT Sloan School of Management,
and his collaborator and coauthor Andrew McAfee have been arguing for
the last year and a half that impressive advances in computer
technology—from improved industrial robotics to automated translation
services—are largely behind the sluggish employment growth of the last
10 to 15 years. Even more ominous for workers, the MIT academics foresee
dismal prospects for many types of jobs as these powerful new
technologies are increasingly adopted not only in manufacturing,
clerical, and retail work but in professions such as law, financial
services, education, and medicine.

That robots, automation, and
software can replace people might seem obvious to anyone who’s worked in
automotive manufacturing or as a travel agent. But Brynjolfsson and
McAfee’s claim is more troubling and controversial. They believe that
rapid technological change has been destroying jobs faster than it is
creating them, contributing to the stagnation of median income and the
growth of inequality in the United States. And, they suspect, something
similar is happening in other technologically advanced countries.

Perhaps
the most damning piece of evidence, according to Brynjolfsson, is a
chart that only an economist could love. In economics, productivity—the
amount of economic value created for a given unit of input, such as an
hour of labor—is a crucial indicator of growth and wealth creation. It
is a measure of progress. On the chart Brynjolfsson likes to show,
separate lines represent productivity and total employment in the United
States. For years after World War II, the two lines closely tracked
each other, with increases in jobs corresponding to increases in
productivity. The pattern is clear: as businesses generated more value
from their workers, the country as a whole became richer, which fueled
more economic activity and created even more jobs. Then, beginning in
2000, the lines diverge; productivity continues to rise robustly, but
employment suddenly wilts. By 2011, a significant gap appears between
the two lines, showing economic growth with no parallel increase in job
creation. Brynjolfsson and McAfee call it the “great decoupling.” And
Brynjolfsson says he is confident that technology is behind both the
healthy growth in productivity and the weak growth in jobs.

It’s a
startling assertion because it threatens the faith that many economists
place in technological progress. Brynjolfsson and McAfee still believe
that technology boosts productivity and makes societies wealthier, but
they think that it can also have a dark side: technological progress is
eliminating the need for many types of jobs and leaving the typical
worker worse off than before. ­Brynjolfsson can point to a second chart
indicating that median income is failing to rise even as the gross
domestic product soars. “It’s the great paradox of our era,” he says.
“Productivity is at record levels, innovation has never been faster, and
yet at the same time, we have a falling median income and we have fewer
jobs. People are falling behind because technology is advancing so fast
and our skills and organizations aren’t keeping up.”

Brynjolfsson
and McAfee are not Luddites. Indeed, they are sometimes accused of
being too optimistic about the extent and speed of recent digital
advances. Brynjolfsson says they began writing Race Against the Machine,
the 2011 book in which they laid out much of their argument, because
they wanted to explain the economic benefits of these new technologies
(Brynjolfsson spent much of the 1990s sniffing out evidence that
information technology was boosting rates of productivity). But it
became clear to them that the same technologies making many jobs safer,
easier, and more productive were also reducing the demand for many types
of human workers.
....

“We were lucky and steadily rising productivity raised all boats for much of the 20th century,” he says. “Many people, especially economists, jumped to the conclusion that was just the way the world worked. I used to say that if we took care of productivity, everything else would take care of itself; it was the single most important economic statistic. But that’s no longer true.” He adds, “It’s one of the dirty secrets of economics: technology progress does grow the economy and create wealth, but there is no economic law that says everyone will benefit.” In other words, in the race against the machine, some are likely to win while many others lose.

The story is of course more complicated than this. Lots of technology will work along with people and make them more productive. Over time, people can also learn new skills and move into new jobs, so the long term trend isn't clear. But I do find it hard to believe in the simple "the economy will adjust as it always has" argument for the reasons that rates of change and time scales matter. Technological advance is accelerating. The more technology we have, the faster we learn to create still more. The only way people will keep up is if technology deployed on a massive scale also helps them learn new skills in an ever faster way. Is that happening?

Thursday, June 13, 2013

This interview of Mariana Mazzucato on the INET blog is hugely important. We're all influenced by some ideas floating around about how the private sector is sleek and efficient, risk taking etc, while the public sector is slow and wasteful, and almost none of this is based on any sound thinking or evidence. It's propaganda almost entirely. Mazzucato helps dispel these myths and her thoughts should be promulgated far and wide:

The Entrepreneurial State: Debunking Public vs. Private Sector Myths

The public sector is often seen as sclerotic and conservative
in contrast with a dynamic and innovative private sector. This
assumption lies at the basis of much of the outsourcing of public
services to the private sector. In this interview and in her new book, Institute for New Economic Thinking grantee Mariana Mazzucato argues
against this assessment and in favour of state-led innovation and
economic growth. She maintains that the public sector usually bears the
highest risks of funding innovation without then reaping the rewards. What are the myths about the public sector and private sector that you say need to be debunked?

The myth is of a dynamic, creative, colourful, entrepreneurial
private sector, that at most needs ‘unleashing’ from its constraints
from the public sector. The latter is instead depicted as necessary for
fixing ‘market failures’ (investing in ‘public goods’ like
infrastructure or basic research) but inherently bureaucratic, slow,
grey, and often too ‘meddling’. It is told to stick to the ‘basics’ but
to avoid getting too directly involved in the economy.

Instead, if we look around the world, those countries that have grown
or are growing through innovation-led growth are countries where the
state did not limit itself to just solving ‘market failures’ but
actually developed strategic missions, and was active in directing
public investment in particular areas with scale and scope, changing the
technological and market landscape in the process. And ironically one
of the government’s that have been most active on this front is the US
government, which is usually depicted in the media (and by politicians)
as being more ‘market oriented’. From putting a man on the moon, to
developing what later became the Internet, the US government, through a
host of different public agencies, provided direct financing not only of
basic research but also applied research and even early stage public
venture capital (indeed Apple received $500,000 directly from public
funds). In each case it provided funding for the most high
risk/uncertain investments, while the private sector sat waiting behind.

What do you say to those who would argue that the government
is not good at picking winners? That government spending crowds our
private investment?

All this fear about the government trying and failing to pick winners
is exaggerated. Both Apple and the technologies behind the iPhone were
picked! But picking winners is more probable when the state is described
as though it is relevant rather than irrelevant. When government is
given a mission, proper funding, and organizes its agencies so they are
dynamic and able to ‘welcome’ the exploratory trial and error process
that accompanies innovation, it can attract top expertise and dynamism.

Today, we see countries that are growing thanks to a courageous
public sector and through mission oriented policies. For example, China
is spending $1.7 trillion on five key new broadly defined sectors,
including ‘environmentally friendly’ technologies. Brazil’s active state
investment bank is spending more than $60 billion just this year on
green technology. The economics profession doesn’t adequately account
for this kind of state-led activity, but only warns of governments
‘crowding out’ private business or failing at picking winners.

What governments are doing today with regards green technology is not
crowding out but crowding in business investment by creating a vision
around it, and funding the most capital intensive areas with high market
and technological risk. But we must also change the language. To me,
‘crowding in’ still sounds negative, as it is being compared to a
benchmark of useless government. In my new book I go into this further,
and suggest some new language and images that can really change the way
we talk about and imagine the space for the public sector.

Could you elaborate on your argument that modern capitalism is rewarding value extraction over value creation?

The problem is that by not admitting this entrepreneurial risk-taking
role that the state provides, we have not confronted a key relationship
in finance: the relationship between risk and return. Innovation is
deeply uncertain, with most attempts failing. For every Internet there
are many Concordes or Solyndras. Yet this is also true for private
venture capital (VC). But while private VC is then able to use the
profits from the 1 out of 10 successes to fund the 9 losses, the state
has not been allowed to reap a return. Economists think this will happen
via tax (from the jobs created, and from the profits of the companies),
yet so many of the companies that receive such benefits from state
funding, bring their jobs elsewhere, and of course we know they also pay
very little tax. Thus the return generating mechanisms must be
rethought. It could be done through retaining equity, a ‘golden share’
of the intellectual property rights, or through income contingent loans.
But currently this is not even discussed. When Google received funding
for its algorithm from the National Science Foundation (NSF), is it
right that after it earned billions nothing went back to the NSF (which
is today starved of funds), or that some of Apple’s profits go into a
national innovation fund to fund the next wave of Apples?

What this means is that we have socialized the risk of innovation but
privatised the rewards. This dynamic is one of the key drivers of
increasing inequality. Because innovation today builds on innovation
tomorrow, the ‘capture’ can be very large. This would not be the case if
innovation were just a random walk. Policy makers must think very hard
how to make value creation activities (done by all the collective actors
in the innovation game) rewarded above value extraction activities (in
this sense capital gains taxes are way too low). And since the booty
from the latter can be very large, redirecting incentives and rewards
towards the value creators is essential. The problem is that some of the
‘extractors’ like to sell themselves as the creators.

Sunday, June 9, 2013

By way of Naked Capitalism, I learned of the video below produced by Nanex, the market data analysis company in Chicago. It runs for just under 6 minutes and shows all the quotes for Johnson & Johnson stock racing among a network of exchanges over just one half second of real time. Watch the whole thing and then remember -- this is just one half second (the clock, bottom middle, goes up in increments of milliseconds). Below the video, some explanation of what you're seeing from Nanex.

We got the idea after realizing, in face to face meetings with them
[the CFTC], they didn’t understand market structure or the importance of
latency and the consolidated feed. That was several years ago. We still
aren’t sure if they get it, or are just playing dumb.

The bottom box (SIP) shows the National Best Bid and Offer. Watch how much it changes in the blink of an eye.

Watch
High-Frequency Traders (HFT) at the millisecond level jam thousands of
quotes in the stock of Johnson and Johnson (JNJ) through our financial
networks on May 2, 2013. Video shows 1/2 second of time. If any of the
connections are not running perfectly, High Frequency Traders can profit
from the price discrepancies that result. There is no economic
justification for this abusive behavior.

Each box
represents one exchange. The SIP (CQS in this case) is the box at 6
o’clock. It shows the National Best Bid/Offer. Watch how much it changes
in a fraction of a second. The shapes represent quote changes which are
the result of a change to the top of the book at each exchange. The
time at the bottom of the screen is Eastern Time HH:MM:SS:mmm (mmm =
millisecond). We slow time down so you can see what goes on at the
millisecond level. A millisecond (ms) is 1/1000th of a second.

Note
how every exchange must process every quote from the others — for
proper trade through price protection. This complex web of technology
must run flawlessly every millisecond of the trading day, or arbitrage
(HFT profit) opportunities will appear. It is easy for HFTs to cause
delays in one or more of the connections between each exchange.

Wednesday, June 5, 2013

My latest Bloomberg column just appeared (or will around 6pm EST today). It takes a look at a landmark economics paper from just over ten years ago, one that I am sure (or at least hope) every macroeconomist, indeed every economist, knows fairly well. Given it's fundamental importance, I'm guessing it is by now probably a staple of undergraduate economics education. I'm referring of course to this study by Robert Clower and Peter Howitt which, in comparison with traditional economic theories, took a major step in actually revealing the mechanisms by which Adam Smith's Invisible Hand might work.

To many economists, this probably sounds crazy. What about Arrow-Debreu and all the thousands of later papers in general equilibrium theory in the same tradition? Don't those all establish how a decentralized market can act to organize economic activity in a remarkably efficient way? We'll, actually, no -- because only a very small fraction of those studies have even tried to model the messy dynamic process by which a huge number of independent people might, through trial and error, through learning, come to lead the market to its final organized state. And NONE, so far as I am aware, established by investigation a plausible dynamical story consistent with realistic human behavior. Hence, the nice story and metaphor of the Invisible Hand really has no plausible counterpart in standard economic theory; it remains no more than a metaphor, even if economists seem loathe to admit that.

But this isn't to say that something like the Invisible Hand idea isn't true and really interesting. The insight inspiring (the late) Clower and Howitt is that human economies probably self-organize into functional states coordinating the disparate activities of many individuals in much the same way ant colonies organize themselves. It's not due to the far-sighted rationality of any one agent (ant or person), but due instead to organizing structures that emerge to help us relatively unintelligent individuals cope with a very complex world. In the words of Howitt from this nice paper from 2007:

The idea motivating the approach is that complex systems, like economies or anthills, can exhibit behavioral patterns beyond what any of the individual agents in the system can comprehend. So instead of modelling the system as if everyone’s actions and beliefs were coordinated in advance with everyone else’s, as in rational expectations theory, the approach assumes simple behavioral rules and allows a coordinated equilibrium to be a possibly emergent property of the system itself. The approach is used to explain system behavior by “growing” it in the computer. Once one has devised a computer program that mimics the desired characteristics of the system in question one can then use the program as a “culture dish” in which to perform experiments.

Now the first reaction of many economists upon first hearing about this methodology is that all economic models with an explicit micro-foundation, which is to say almost all models that one sees in mainstream macroeconomic theory, are “agent-based”. Some even have a multitude of heterogeneous agents (see Krusell and Smith, 1998 and Krebs, 2003, among others). So what’s the big deal?

The big deal, as Tesfatsion has emphasized on many occasions, has to do with autonomy. An agent in a rational-expectations-equilibrium model has a behavioral rule that is not independent of what everyone else is doing. In any given situation, her actions will depend on some key variables (prices, availability of job offers, etc.) or the rational expectation thereof, that are endogenous to the economic system. These variables will change when we change the agent’s environment, and hence her behavior cannot be specified independently of the others’. The household, for example, in a market-clearing model of supply and demand cannot choose what quantity to demand until told what price will clear the market. Likewise the agent on a Lucas island (a Phelps Island with rational expectors) cannot choose how much to sell until informed of the stochastic process determining aggregate and relative demand fluctuations.

The problem with assuming non-autonomous agents is that it leaves the model incomplete, and in a way that precludes a deep analysis of the coordination problem. For if the model does not allow people to act without knowing the equilibrium value of some variable, then someone must have computed that equilibrium value a priori. In such a model there is no way to describe out-of-equilibrium behavior, and the problem of reconciling peoples’ independently conceived plans is assumed to be solved by some unspecified mechanism that uses no scarce resources...

Now under certain assumptions about common information, someone endowed with enough information could figure out on her own what the market-clearing price is going to be, or what the rational expectation of the price level is, and in this sense could act autonomously even in a rational-expectations equilibrium framework. But an economy full of agents that were autonomous in this sense would not be decentralized in the Hayekian sense, because no market would be needed to aggregate the diverse information of heterogeneous people, each of whom can do the aggregation in her head. Each would be capable of acting as the economy’s central planner, although in this case the planner would not be needed. Moreover, such an economy would have no need for macroeconomists, because everyone would already know as much as could be known about the macroeconomy. The coordination problem would be trivial. So by “autonomous” agents I mean agents that are endowed with behavioral rules that can tell them what to do in any given situation, independently of each others’ rules, even when no one has access to a correct model of the economy.

What Clower and Howitt showed in their 2000 paper -- and Howitt has expanded upon since in work with other economists -- is that autonomous agents of limited intelligence working on their own in an economic setting can readily self organize their activities into a functioning system with an intelligence far beyond their own. In their model, the coordinating infrastructure is a network of firms that emerges to make it easier for people to find the goods they need, vastly simplifying the problem of matching producers and consumers. I won't spoil the story. See some of Howitt and his colleagues' most recent papers, such as this one, for a nice summary of the original model and developments since then.

One of the most important things emerging from this work, in my opinion, is a way to look at the mechanisms behind economic coordination in a much more specific way. When an economy gets hit by a crisis and goes into recession, things happen which cannot easily be reversed, and certainly not instantaneously. Firms go out of business and then do not exist. This leaves gaps in the coordinating network which puts additional stress on other firms or individuals. An economy, like a broken bone, has suffered real damage that requires both time and the consumption of resources to overcome. Of course, you cannot even begin to understand how the key coordinating infrastructure can be damaged, or how it might be repaired, if you have no theoretical apparatus to describe that coordinating structure in the first place -- this is the position of modern mainstream (neo-classical) economics.

Hence, it's important to remember when confronting the rhetorical arguments of the OpEd pages -- for or against "austerity" or "fiscal stimulus" or some other policy -- that the economist you are reading has either based his or her views on a theoretical model that doesn't even try to model the key mechanisms of self-organizing coordination, or has come to a belief for other reasons, perhaps (in the best cases) a deep reading of history. There are other possibilities, of course.

I must say, this whole thing seems amazing to me. I would have thought that Clower's and Howitt's lead would have immediately been picked up by any macroeconomist eager to make progress. It would have swept in a new approach to understanding macroeconomic dynamics, displacing the older approaches; after all, it actually describes how the Invisible Hand works, whereas they do not. Obviously, this hasn't been the case, which in itself says something disturbing about the state of today's economics. It's clearly not all about seeking a better understanding.

Search This Blog

This blogexplores the potential for the transformation of economics and finance through the inspiration of physics and the other natural sciences. If traditional economics has emphasized self-regulation and market equilibrium, the new perspective emphasizes the myriad positive feed backs that often drive markets away from equilibrium and cause tumultuous crashes and other crises. Read more about the idea.

Who am I?

Physicist and science writer. I was formerly an editor with the international science journal Nature and also the magazine New Scientist. I am the author of three earlier books, and have written extensively for publications including Nature, Science, the New York Times, Wired and the Harvard Business Review. I currently write monthly columns for Nature Physics and for Bloomberg Views.